Two businesses joining forces in today’s world is not an uncommon phenomenon. Especially when it comes to small and medium-sized businesses: their expansion, or the creation of a brand new product or concept that neither party has the knowledge, resources, or capacity to do separately. In such situations, they seek a partnership agreement, often based on outsourcing. Today, we’re going to talk about the Revenue Share Model and why it’s a profitable business decision in many cases.
The Basic Concept of Revenue Share and What It Looks Like in Practice
The core of Revenue Share in terms of a partnership program is to combine the strengths of two or more companies, and to share in the profits and the risks associated with the goal.
In order to push business growth to a whole new level, the two companies coming together should cooperate. This is not a give and take relationship. Instead, each party invests its expertise and knowledge in the development. To illustrate, this might look like outsourcing the development of a software product and its marketing promotion. One partner develops and the other promotes it. The profit from this product will be divided according to the partnership agreement, drafted in advance, and described in detail.
What Does an Example of the Revenue Share Model Look Like?
Let’s imagine that there’s an organization, and let’s call it Company A. Company A needs to develop and implement an application but doesn’t have the know how or the resources to hire the know how in house. However, another organization that we’re going to call Company B specializes in software development. Instead of being paid for labor or strategy, the agreement specifies the final division of profits generated by the implementation of the new application to the market and marketed by Company A.
If Company A experiences business challenges that reduce customer turnover, Company B can proportionally reduce its spending on IT infrastructure. In other words, Company B’s developers provide services within the potential cost that Company A can provide. Company B is interested in ensuring that Company A’s turnover goes up. Despite the fixed percentage, if the absolute sum earned goes up, so does the income. Both parties should be as interested as possible in the growth of the business while sharing the risks.
In reality, there can be more partners than just Company A and Company B. The basic principle is to offer something of value that the other side does not have: a valuable idea, expertise, skills, or resources.
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How to go About Finding a Suitable Partner
At first glance, it seems like a very convenient model of partnership, but its risks are high if you choose an unscrupulous partner.
As practice shows, you should not take on good friends or relatives as partners, unless you’re ready and understand the personal relationship can be strained to the point of breaking. It’s also ineffective to look for partners with the help of ads, landing pages, advertising, or approach the CEOs of large organizations.
The best way is the traditional way, through your personal network. To find partners willing to work on the Revenue Share model, finding partners means sending messages, making phone calls, and attending conferences and events where there will be people and companies that your business needs.
The key to success is communication. It’s important to constantly interact and emphasize the important points for all sides of the partnership, and to adhere to the hygiene of the business relationship. In addition to great expectations, great risks have to be taken into consideration. Therefore, besides verbal agreements, it’s necessary to fix everything in detail on paper.
How to Build Trust with a Potential Partner
Before you sign any agreements, you need to build trust with your partners. Trust is only possible with those who are willing to work honestly and respect the laws, including everything to do with income.
If a partner has the ability to adjust figures manually, it’s better not to do business. Automating processes can be a guarantee of transparent cooperation. It would be even safer if a third, disinterested party handles financial matters. Then the associate won’t have the ability to forcibly understate profits in order to share less of them with you.
How to Draft a Partnership Agreement
Partnership approval for the Revenue Share agreement is mandatory. All parties must clearly understand why they want to cooperate, what they are willing to invest in, and what they want to get as a result. In addition, it should be understood that the partnership agreement may be revised from time to time by the mutual consent of the parties.
Here it’s necessary to designate each party, its value, and contribution to the cooperation. Next, the main focus of the partnership, the goals, the criteria for achieving the goal, and the exit conditions for each partner must be outlined.
The Termination Process
The process of terminating a partnership agreement should be a separate important point to focus on. For a painless exit for one or more partners, risk and terms of cancellation must be calculated in advance. For example, if one of the parties doesn’t adhere to the terms, or doesn’t achieve the necessary performance, the other party can terminate the contract, so as not to bring matters to devastating consequences through no fault of their own. If circumstances don’t allow a partner to leave the partnership, it’s possible to stipulate compensation beforehand.
This part of the agreement should clearly indicate who invests what in the business (money, time, experience, connections, etc.), and then outline the shares in case of positive development.
Tips to Avoid Pitfalls
1. Monitor the performance and test the result.
2. Choose partners of equal scale. It may not be a big loss for a large business to fail, but medium and small businesses can lose everything. Also, if successful, the profits will be divided according to the investment.
3. Be flexible, stick to a step-by-step plan. Small actions make it possible to make changes at any stage.
4. Don’t invest all of your budget or capacity into one project.
As practical experience shows, the Revenue Share agreement may be comfortable for an established business because it’s a mature business that can allocate the budget to different areas so as not to lose everything, but not for a startup. However, despite all the hardships, this is one of the best ways to attract the missing link for the development of a project. If the project hits, it usually pays off financially several times. The key to the success of a Revenue Share-based endeavor is a careful selection of a diligent partner and proper documentation.
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